News Press Releases

Fitch Affirms Vornado's IDR at 'BBB' On D.C. Portfolio Spin Announcement

VNO | November 1, 2016

Fitch Ratings has affirmed the 'BBB' Issuer Default Ratings (IDRs) for Vornado Realty Trust (NYSE: VNO) and its operating partnership Vornado Realty, LP after reviewing the company's planned distribution and subsequent merger of its Washington D.C. portfolio with JBG Companies. The Rating Outlook is Stable. A full list of Fitch's ratings for VNO can be found at the end of this release.

KEY RATING DRIVERS

Vornado's planned Washington, D.C. portfolio spin-off is negative for bondholders; however, the company's credit profile will remain appropriate for the 'BBB' rating. Post spin, VNO will own a high-quality portfolio with above average liquidity elements, albeit principally concentrated in Manhattan office and street retail assets. The absolute and relative size of VNO's unencumbered pool will decline, but unencumbered asset coverage of unsecured debt (UA/UD) will remain high at roughly 4.0x, providing excellent contingent liquidity.

Fitch views development missteps and an unexpected downturn in New York City commercial real estate (CRE) fundamentals that exceeds the agency's stress case projections as the primary risks to VNO's credit profile. Execution risk surrounding the D.C. portfolio spin-off appears limited.

Greater Concentration Risk

Fitch views VNO's D.C. market exit as a credit negative given D.C.'s through-the-cycle market appeal and less than perfect CRE value correlation with New York City. VNO's cash flow will also no longer benefit from $144 million of U.S. Government rental income (5.7% of pre-spin rent) generated by its D.C. portfolio. New York City will increase to 90% of VNO's EBITDA from 70% following the distribution of its Washington D.C. portfolio to shareholders.

New York City's superior CRE market characteristics help mitigate the market concentration risk. New York City is the largest and arguably the most diverse office market in the U.S. And New York City CRE has above average contingent liquidity characteristics due to superior institutional lender and investor demand.

VNO's New York portfolio will have some property type diversification between office and retail rent. The company's Chicago MART and 555 California office property in San Francisco will comprise most of the 11% of portfolio EBITDA that VNO will generate from outside New York post spin.

Moderately Higher Leverage

Fitch expects VNO to target leverage in the mid-6.0x range through the cycle, which is appropriate to strong for a 'BBB' rated REIT with VNO's asset profile. New York City cap rates are among the lowest in the U.S., resulting in higher debt to EBITDA at comparable debt to loan-to-value ratios in less desirable markets.

Fitch projects VNO's leverage will increase over the next 12 to 36 months into the 7x-8x range as it completes the 220 Central Park South (CPS) condominium development. The agency's rating case assumes the company uses sales proceeds return leverage to the low 7.0x range by 2019.

Fitch also considers VNO's leverage excluding 220 CPS. The investment is opportunistic, outside of the company's core strategy (and unlikely to be repeated on a similar scale). Additional risk mitigants include $950 million of related, secured, non-recourse construction funding and strong condo unit presales, which exceed the projects costs.

Fitch has not included spending for the company's Farley Building joint venture in its projections given limited visibility regarding the amount and timing. However, we view this investment as consistent with the company's core strategy and would expect the company to fund it in a manner that is consistent with VNO's financial policies. VNO's leverage could exceed Fitch's forecast under a 100% debt-funded scenario for its share of the Farley building redevelopment, including any repositioning spending at the company's legacy Penn Plaza properties.

VNO has ample liquidity to complete the roughly $800 million of unfunded development expenses. The company plans to retain its $2.5 billion revolving credit capacity (comprised of two $1.25 billion facilities with staggered maturities) following the spin, notwithstanding its smaller size.

Strong Unencumbered Asset Coverage

Fitch estimates that VNO's UA/UD will approximate 4.0x following the spin, which is a strong absolute and relative level. However, VNO will lose $160 million or 25% of its annualized unencumbered EBITDA due to the spin, which will reduce the company's UA/UD coverage from the low 7.0x range.

VNO's UA/UD is strong for the 'BBB' rating, particularly given the institutional investor and lender interest in Manhattan office and retail properties, providing above-average contingent liquidity across core CRE property types.

The strength of VNO's coverage ratio is driven by the quality of assets, the issuer's limited unsecured debt and the strategy of placing higher loan-to-value ratios on the properties that are encumbered. Fitch calculates UA/UD by applying a 7.0% cap rate to annualized unencumbered property EBITDA unsecured debt.

KEY ASSUMPTIONS

--The company completes the spin-off of its D.C. portfolio during mid-2017;

--Same-store net operating income growth of 2.5% on average through 2019;

--Development spending of roughly $450 million during 2016 and 2017 and $112 million during 2018 related to the completion of 220 CPS;

--VNO reduces its common dividend by an amount similar to the lost income from its D.C. portfolio;

--VNO ratably sells out the units in 220 CPS during 2018 and 2019, using proceeds to reduce project related borrowings and for special dividends.

RATING SENSITIVITIES

The following factors could result in positive momentum in the ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6.0x;

--Fitch's expectation of fixed-charge coverage sustaining above 2.5x for several consecutive quarters.

Conversely, the following factors may result in negative momentum in the ratings and/or Outlook:

--Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.5x;

--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;

--Fitch's expectation of a sustained liquidity coverage ratio below 1.0x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Vornado Realty Trust

--IDR at 'BBB';

--Preferred stock at 'BB+.

Vornado Realty, L.P.

--IDR at 'BBB';

--Unsecured revolving credit facilities at 'BBB';

--Senior unsecured notes at 'BBB'.

Fitch also assigned a 'BBB' rating to the $750 million senior unsecured term loan due 2020. The term loan currently has $375 million outstanding.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock based compensation and include operating income from discontinued operations.

--Fitch has adjusted the historical and projected net debt by assuming the issuer requires approximately $300 million of cash for working capital purposes which is otherwise unavailable to repay debt.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014134

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https://www.fitchratings.com/regulatory

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